Thank you for sharing!

Your article was successfully shared with the contacts you provided.
San Francisco-based Providian Financial Corp. has agreed to pay $38 million to settle a class action securities fraud suit that accused the credit card company of inflating its profits with illegal charges to consumers that it was later forced to pay back in a $300 million settlement of a consumer class action. In a brief filed Wednesday, plaintiffs’ lawyers asked U.S. District Judge William H. Yohn Jr. of the Eastern District of Pennsylvania to grant preliminary approval of the settlement and schedule a fairness hearing. Attorneys Lester Levy, Robert C. Finkel and Kent A. Bronson of Wolf Popper, along with Andrew J. Entwistle and Catherine Torrell of Entwistle & Capucci, both New York firms, argue that the $38 million settlement is an “excellent result” in a securities case where there was no restatement of financial statements, no investigation by the SEC and no insider trading. And considering Providian’s “deteriorated” financial condition, they argue that the settlement is “truly remarkable” since the company’s only source of funds is $57 million in remaining director-and-officer insurance, and investors will be getting about two-thirds of that. “Given the dramatic decline in Providian’s common stock price in late 2001 and 2002, to prices as low as $2.01 per share, there was a material risk that Providian would file for bankruptcy and that [its insurance policies] would be claimed as assets of the bankruptcy estate,” they said. The first of the shareholders’ suits was filed soon after news broke in May 1999 that the San Francisco district attorney’s office was investigating Providian’s credit card business practices. The price of Providian’s stock declined from $124.13 to $106.94 the day after the first news accounts and continued to plunge over the next two weeks to $78.44 — a drop of nearly 37 percent. If approved by the court, the settlement will benefit investors who purchased Providian stock between Jan. 21, 1999, and June 4, 1999, a period in which 27 million shares traded. Plaintiffs’ lawyers estimate that the average recovery will be about $1.40 per damaged share before the deduction of attorney fees and expenses. Under the settlement, the plaintiffs’ lawyers will be entitled to petition for fees of up to 30 percent of the fund, or $11.4 million, plus up to $275,000 in costs reimbursement. Early on in the litigation, Providian’s lawyers — Norman J. Blears and George H. Brown of Heller Ehrman White & McAuliffe’s Menlo Park, Calif., office — urged Judge Yohn to dismiss the suit, arguing that the investors couldn’t show that Providian “knew or should have known” that its practices were inappropriate or that they would result in such a large settlement. Yohn disagreed, saying the suit “amply alleges” that Providian and two of its top executives — CEO Shalish Mehta and Chief Financial Officer David Petrini — knew or should have known they were making statements to investors that were either false or omitted material information. Yohn found that the allegedly illegal sales practices and customer charges that led to the consumer suit settlement, and which the investors said were used to inflate profits, “relate to a core aspect of Providian’s business.” Mehta and Petrini, he said, were “high-level managers” who can be held responsible for knowing of the alleged “deficiencies in billing and accounting” and the “materially false and deceptive sales practices,” since they were “core to Providian’s existence as a credit provider.” Yohn found that the suit properly alleged “scienter” on the part of both of the executives, by alleging that they received periodic sales reports and reports on consumer-fee revenue and “flash reports” that showed that Providian’s improper sales and accounting practices were succeeding in inflating the company’s revenues. “This information should have notified Mehta and Petrini of Providian’s remarkable success and simultaneously should have given them reason to verify the source of the success,” Yohn wrote. Reports from the company’s legal collection department to senior management, he said, also showed that late and over-limit fees were “extraordinarily high” — a fact that “should have roused the [executives'] suspicions.” Yohn said the suit also alleged that Mehta and Petrini “approved or allowed the use of high-pressure and misleading scripted sales presentations by Providian’s sale force to mislead customers into accepting non-interest fee-based products, or which facilitated the improper ‘adding on’ of unwanted products to customers accounts.” The case meets the new, stricter requirements of the Private Securities Litigation Reform Act, Yohn said, because it alleges that “Providian’s illegal or fraudulent practices permeated core aspects of Providian’s business and were so pervasive that Mehta and Petrini must have known or were reckless in not knowing.” Such allegations, Yohn said, “suffice to establish facts that support a strong inference of knowledge or recklessness.” Providian’s primary business is credit card lending which generates two types of revenue — interest and non-interest. Interest revenue comes from finance fees on outstanding credit card loans. Non-interest revenue comes from a variety of other sources, including fees for late payments, returned checks, overlimit debits, cash advances, membership and “add-on” services. Providian’s add-on services include programs for health care discounts, automobile and travel discounts, credit protection, and mortgage or rent assistance. Providian also has various programs to induce consumers to transfer credit card balances from other creditors. In the securities suit, investors claimed that Providian’s illegal sales practices resulted in a false inflation of the company’s profits. In a January 1999 press release, the company announced that its 1998 fourth-quarter net income was $94.9 million, and that full-year net income was $296.4 million — “a 55 percent increase over net income of $191.5 million in 1997.” The press release also said “total managed revenue” had increased to $2.4 billion for the previous year, and that 1.9 million new accounts had been added, swelling the company’s customer base to 8 million. But investors said those figures were all inflated by Providian’s illegal sales practices that were soon to result in a massive class action settlement. In June 2000, Providian agreed to pay $300 million in restitution to its customers and $5.5 million in civil penalties to settle lawsuits brought by the San Francisco district attorney’s office and the Connecticut Attorney General. Those suits accused Providian of eight allegedly illegal or fraudulent business practices, most of which relate primarily to the generation of non-interest revenue: � Providian charged customers for fee-based products without getting customer consent. Sales reps used high-pressure tactics, and Providian imposed aggressive sales quotas. To meet their quotas, sales reps charged customers for products without their consent. Customers who complained were channeled to unit managers who also received bonuses for fee-based product sales. � Providian marketed its “credit protection” program as a way for hospitalized or unemployed customers to avoid credit card payments for up to 18 months. The company also claimed that no interest would be charged during credit-protected periods of nonpayment. However, the program’s numerous restrictions were not adequately disclosed. Customers’ requests for informational literature were routinely ignored. Although sales materials indicated that there was no charge for credit protection on accounts with balances over $5,000, Providian’s fee actually increased with higher balances. � Credit cards were marketed as carrying no annual fee, but the company failed to disclose that new customers could be and often were required to maintain credit protection, for which Providian charged $156 per year — a fee the company suggested was “included” with the card. Customers who protested were told that cancellation of credit protection would result in annual fees. � Consumers were promised a rate as low as 7.99 percent on balances transferred from other credit cards, but did not receive rates that low. If pressed, sales reps told potential customers that Providian would beat the interest rate they were currently paying but would provide no other specifics. In reality, Providian would only beat others’ rates by as little as 0.7 to 0.3 percent. � Prospective customers were promised cash rewards of up to $200 for transferring balances, but Providian failed to disclose that a certain minimum balance must be transferred to qualify for the reward. � Providian managers instructed employees to delay posting credit card payments so that the company could charge late fees on individual credit card accounts. Unless a customer complained, Providian strongly discouraged the reversal of late fees discovered to be erroneous. � Providian’s legal collections department would routinely agree to allow delinquent customers to pay off their accounts in 4 percent increments. But the company often failed to honor such agreements and proceeded to “escalate” collection by taking legal action and assessing the delinquent customers with attorney fees ranging from 10 percent to 33.3 percent of the outstanding balance. � The company’s home loan department, which managed the mortgage and rent assistance program, began aggressive marketing in late 1997. Customers were often falsely told that interest rates on home loan protection borrowing would not increase. Sale reps were very aggressive and would often charge customers for the program without consent.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.